Cuts are an economic disaster says Stiglitz

The Nobel Prize winning economist Joseph Stiglitz has issued a stark warning that austerity cutbacks will be an economic disaster. He claims that they will just prolong the current global recession.

"If that (he means cutbacks) happens I think it is likely that the economic downturn will last far longer and human suffering will be all the greater," he said.

Joseph Stiglitz is a professor at New York's Columbia University and in 2001 won the Nobel Memorial Prize in Economic Sciences. Professot Stiglitz is critical of how globalisation has been managed and those that call for a global free market. He has been the Senior Vice President and Chief Economist at the World Bank. He now also chairs the University of Manchester'sÂ Brooks World Poverty Institute.

Reported in the Telegraph, he claims that historical evidence indicated that the way to get out of a downturn was for the state to increase spending. In one article, Obama must resist 'deficit fetish', on Feb 2010 he wrote "The real risk for America right now is a prolonged weak economy – something that a mindless focus on deficits can help ensure".

In echoes of the arguments going on in countries around the world he went on "They say it was necessary to the health of the economy to dole out money to the banks; but not necessary to the health of our society to make sure everyone has access to health care. It was not acceptable to alter the contracts of the AIG personnel, even those “key” and irreplaceable personnel who made the mistakes that led to a $180 billion bailout, but acceptable to break the social contract between America’s elderly and the rest of society, by cutting back on Social Security."

But an equal number of people would say 'where is the money to come from?' And the answer always seems to be 'from the future' in the form of more debt that will have to be repaid.

The whole point really is that recessions can easily be cushioned by state spending, but the state needs to save up for them beforehand during the good times. Not rely on debt after the event But here's the problem, if the state did save up a recession busting war chest you can bet that the public would be demanding in their millions that it be spent right now on more schools, hospitals and foreign aid today and hang the future.

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3 Comments

I would note protectively that the Stiglitz quote is from a Reuters story (not Telegraph).

admin
on September 8, 2010 at 3:52 pm

Thanks for the note. We hadn't highlighted the fact there is a hyperlink to where the quote came from (Politico). Link now bolded.

Phil Grimm
on September 8, 2010 at 6:20 pm

For a Nobel prize winning economist he seems pretty dumb to me. He is correct that cuts will make the recession worse but I disagree that it will make the recession longer. We'll come out of it sooner and in better shape than if go on increasing the National Debt in order to steal demand from the future.